Clueless Bloomberg Headline: China Weighs Halting US Bond Purchases

Two Bloomberg articles, retweeted multiple times today, prove financial writers don't know how markets function.

Please consider the following pair of Bloomberg articles.

The amount of mistaken hype over the years on this subject has simply been staggering.

Here are some Tweets from today.

Historic Headline Not

Mathematical Certainty

The US runs a trade deficit. As a mathematical certainty nations who perpetually run surpluses with the US accumulate US assets. Foreign countries do not hold dollars they hold treasuries.

From time to time countries may use those dollars for things like halting capital flight to prop up the Renminbi.

Countries may also buy other US assets. China would probably love to buy Boeing for example, but Congress would surely block such an attempt.

Meanwhile, as long as the US runs a deficit with China and Japan, China and Japan are going to keep buying US treasuries or other US assets. It's a mathematical certainty.

The Vise

Any alleged "vise" is a two-way street. The US gets cheap goods from China and China accumulates US treasuries. If, as some claim, "China is dumping below cost goods into the US", then as a matter of mathematical certainty the US consumer has benefited at the expense of China.

Some might argue that China will or should "dump treasuries." To whom? How? Let's see the math.

Someone must hold every treasury issued 100% of the time, and creditors mathematically must accumulate US assets of some sort as a result of trade surpluses.

For political purposes Chinese officials may make any statements they like. Bloomberg ought to point out the fallacies in them, but instead hypes them up, and people retweet them as if they are accurate.

Mike "Mish" Shedlock​

This situation is actually very analogous to when the Indians sold Manhattan Island for blankets, beads and trinkets. We are selling the US for cell phones and trinkets. Five years from now those will all be in the landfill, but the land they bought with the profits they will be theirs forever.

Yup. Remember, the deficit spending comes first, then the Treasury issues treasury bills and bonds to hoover up the dollars that the federal government has already spent into existence. The Treasury auctions only occur because they must do by statute, and because they need a mechanism to hoover-up all those dollars spent into existence. The federal government does not need to borrow money in order to spend it. That is a myth.

And to Carl_R, sure China does not need to hold US treasuries ("UST"). In fact, China does not need to hold UST (nor USD denominated assets) at all. China could sell every UST it owns and buy every overpriced house and commercial property in London, Sydney and Vancouver. But whoever bought all those UST from China now owns UST. Someone must own every financial security issued until it is retired. And the only place US dollars can go to retire is the US Treasury, for the purchase of UST.

China doesn't need to buy treasuries with their excess dollars anymore than I do with my "excess" dollars. Yes, the dollars need to go somewhere but there are a million options.

Warren Buffett buys the stock of a company, then tells the world. Stock price rises.

China doesn't need to buy treasuries with their excess dollars anymore than I do with my "excess" dollars. Yes, the dollars need to go somewhere but there are a million options. - NOPE - There are not a million options - Do not confuse Chinese capital flight out into US properties with government actions. Yes the could buy real estate - in theory - but they need liquid assets to stop capital flight - Treasuries - I suppose gold

I agree MS, however they are accepting UST as payment in the BIS trade deficit transaction, so what are they going to do, demand dollars? that would deflate the value of the bonds they already have in a hurry. I do not confuse China's capital flight with government actions, THEY ARE THE SAME THING, (and such is the truth on everything North Korea says and does has the tactic approval of Bejing) I have read the boilerplate, their manifesto, they have a representative government after all.

Stan88 is right that the way they would shrink their balance sheet is to let the assets mature and not reinvest, but there would still be the question of what they would do with the principle.

Can someone please explain Mish's point. The black and white graph shows China UST at around 1200 billion USD since 2011, but we have had a trade deficit of around 300 billion USD each of those years. According to the logic presented by Mish, China should hold something closer 3600 billion UST currently, what am I missing?

-> ace33, your point is well illustrated. I have read Mish's same explanation over the years about China UST purchase vs US deficit is a mathematical axiom, but I am always confused WHY? China can certainly dump UST to acquire foreign companies, loan UST to build infrastructure (Silk Road) and expect payment back in Renminbi perhaps, or other commodities like copper, iron, oil, etc., acquire other mining operators, and many other alternatives. The move away from the Dollar has increased since 2009.